U.S. Department of Health and Human ServicesOffice of the Assistant
Secretary for Planning and Evaluation

July 25, 2002

This paper was prepared by the Office of Disability, Aging and
Long-Term Care Policy within the U.S. Department of Health and Human Services.
For additional information, you may visit the DALTCP home page at
http://aspe.hhs.gov/daltcp/home.htm or contact the office at HHS/ASPE/DALTCP,
Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC
20201. The e-mail address is: webmaster.DALTCP@hhs.gov.

American health care is the envy of the world, but with rapidly rising
health care costs, reforms are needed to make high-quality, affordable health
care more widely available. These include new approaches to making
employer-provided coverage more affordable, new initiatives to help states
expand Medicaid and S-CHIP coverage for lower-income persons, and new policies
including health insurance credits for persons who do not have access to
employer or public health insurance. A critical element for enabling all of
these reforms to provide real relief, and to help all Americans get access to
better and more affordable health care, is curbing excessive litigation.

Americans spend proportionately far more per person on the costs of
litigation than any other country in the world. The excesses of the litigation
system are an important contributor to "defensive medicine"--the costly use of
medical treatments by a doctor for the purpose of avoiding litigation. As
multimillion-dollar jury awards have become more commonplace in recent years,
these problems have reached crisis proportions. Insurance premiums for
malpractice are increasing at a rapid rate, particularly in states that have
not taken steps to make their legal systems function more predictably and
effectively. Doctors are facing much higher costs of insurance, and some cannot
obtain insurance despite having never lost a single malpractice judgment or
even faced a claim.

This is a threat to health care quality for all Americans. Increasingly,
Americans are at risk of not being able to find a doctor when they most need
one because the doctor has given up practice, limited the practice to patients
without health conditions that would increase the litigation risk, or moved to
a state with a fairer legal system where insurance can be obtained at a lower
price.

This broken system of litigation is also raising the cost of health care
that all Americans pay, through out-of-pocket payments, insurance premiums, and
federal taxes. Excessive litigation is impeding efforts to improve quality of
care. Hospitals, doctors, and nurses are reluctant to report problems and
participate in joint efforts to improve care because they fear being dragged
into lawsuits, even if they did nothing wrong.

Increasingly extreme judgments in a small proportion of cases and the
settlements they influence are driving this litigation crisis. At the same
time, most injured patients receive no compensation. Some states have already
taken action to squeeze the excesses out of the litigation system. But federal
action, in conjunction with further action by states, is essential to help
Americans get high-quality care when they need it, at a more affordable cost.

Access to Care is Threatened

There are a number of obstacles that limit access to affordable health
care in this country, including lack of affordable insurance and an outdated
Medicare program. We now face another--the litigation crisis that has made
insurance premiums unaffordable or even unavailable for many doctors, through
no fault of their own. This is making it more difficult for many Americans to
find care, and threatening access for many more.

Nevada is facing unprecedented problems in assuring quick access to
urgently needed care. The University of Nevada Medical Center closed its trauma
center in Las Vegas for ten days earlier this month. Its surgeons had quit
because they could no longer afford malpractice insurance.1 Their premiums had increased
sharply, some from $40,000 to $200,000. The trauma center was able to re-open
only because some of the surgeons agreed to become county government employees
for a limited time, which capped their liability for non-economic damages if
they were sued. This is obviously only a temporary solution. If the Las Vegas
trauma center closes again, the most severely injured patients will have to be
transported to the next nearest Level 1 trauma center, five hours away. Access
to trauma care is only one problem Nevada faces; access to obstetrics and many
other types of care is also threatened.

Overall, more than 10% of all doctors in Las Vegas are expected to
retire, or relocate their practices by this summer.2 For example, Dr. Cheryl Edwards,
41, closed her decade-old obstetrics and gynecology practice in Las Vegas
because her insurance premium jumped from $37,000 to $150,000 a year. She moved
her practice to West Los Angeles, leaving 30 pregnant women to find new
doctors.3

Dr. Frank Jordan, a vascular surgeon, in Las Vegas, left practice.
"I did the math. If I were to stay in business for three years, it would cost
me $1.2 million for insurance. I obviously can't afford that. I'd be bankrupt
after the first year, and I'd just be working for the insurance company. What's
the point?"4

Other states are facing the same problem. A doctor in a small town
in North Carolina decided to take early retirement when his premiums
skyrocketed from $7,500 to $37,000 per year. His partner, unable to afford the
practice expenses by himself, may now close the practice, and work at a
teaching hospital.5

Pennsylvania physicians are also leaving their practices. About 44
doctors at the height of their careers in Delaware County outside Philadelphia
left the state in 2001 or stopped practicing medicine because of high
malpractice insurance costs.6

When Chester County (Pennsylvania) physicians were polled in January
2001, 65% said they were seriously considering moving their practice to another
state. Many specialists (such as neurosurgeons) have already moved to less
hostile medical-legal environments of surrounding states.7

At Frankford Hospital's three facilities in Northeast Philadelphia
and Bucks County, all twelve active orthopedic surgeons decided to lay down
their scalpels after their malpractice rates nearly doubled to $106,000 each
for 2001.8

Many physicians in Ohio saw their malpractice premiums triple in
2001, and some are leaving their practice as a result. Dr. James Wilkerson, an
Akron urologist, decided to retire. Had Dr. Wilkerson continued to practice, he
would have spent seven months of his yearly income to cover the $84,000
premium. "I would have had to go back to working 90 hours a week and I didn't
want to do that..."9

West Virginia is also facing critical access problems for urgently
needed care such as obstetrics. In rural areas, such as Putnam County and
Jackson County, the sole community provider hospitals have closed their OB
units because the obstetricians in those areas cannot afford malpractice
insurance.10

Many communities in Mississippi are losing access to needed medical
care. Physicians who specialize in family medicine and obstetrics/gynecology in
Indianola, and in other rural areas of the state, have stopped delivering
babies because of skyrocketing insurance costs.11 Ambur Peterson's obstetrician in Cleveland,
Mississippi, stopped practicing three weeks before her due date, and she had to
drive out of state, over a hundred miles, to Memphis, Tennessee, to get the
care she needed.12

Most of the cities with populations under 20,000 in Mississippi no
longer have doctors who deliver babies.13 Doctors in Natchez say they will relocate
their practice across the Mississippi River to Louisiana because of the cost of
insurance in Mississippi and runaway jury awards. They are planning a new $6
million medical office building in Vidalia, Louisiana.14

In Georgia, the 80-bed Bacon County Hospital in Alma took out a loan
to cover a premium that more than tripled.15

Another Georgia hospital, Memorial Hospital and Manor in Bainbridge,
that operates a hospital and a nursing home, was faced with a 600%
increase.16

In New Jersey, 65% of the hospitals report that physicians are
leaving because of increased premiums (over 250% over the last three
years).17

In Tacoma, Washington, some doctors were faced with a tripling of
their premiums. High premium rates and an inability to obtain insurance may
force many physicians in the state to leave.18

Doctors who would volunteer their time to provide care in free
clinics and other volunteer organizations, or who would volunteer their
services to the Medical Reserve Corps, are afraid to do so because they do not
have malpractice insurance. This makes it more difficult for clinics to provide
care to low-income patients. The clinics must spend their precious resources to
obtain their own coverage, and have less money available to provide care to
people who need it. The proportion of physicians in the country providing any
charity care fell from 76% to 72% between 1997 and 1999 alone, increasing the
need for doctors willing to volunteer their services.19

Health Link Medical Center opened in March 2001 in Southampton,
Pennsylvania, to provide free health care to the working poor. Dr. Theodore
Onifer, a retired physician, volunteers his services on the board but is unable
to volunteer to provide medical care because of the fear of lawsuits and the
cost of insurance.

Patient Safety is Jeopardized

Because the litigation system does not accurately judge whether an error
was committed in the course of medical care, physicians adjust their behavior
to avoid being sued. A recent survey of physicians revealed that one-third
shied away from going into a particular specialty because they feared it would
subject them to greater liability exposure.20 When in practice, they engage in defensive
medicine to protect themselves against suit. They perform tests and provide
treatments that they would not otherwise perform merely to protect themselves
against the risk of possible litigation. The survey revealed that over 76% are
concerned that malpractice litigation has hurt their ability to provide quality
care to patients.

Because of the resulting legal fear:

79% said that they had ordered more tests than they would, based
only on professional judgment of what is medically needed, and 91% have noticed
other physicians ordering more tests;

74% have referred patients to specialists more often than they
believed was medically necessary;

51% have recommended invasive procedures such as biopsies to confirm
diagnoses more often than they believed was medically necessary; and

41% said that they had prescribed more medications, such as
antibiotics, than they would based only on their professional judgment, and 73%
have noticed other doctors similarly prescribing excessive medications.

Every test and every treatment poses a risk to the patient, and takes
away funds that could better be used to provide health care to those who need
it.

Physicians' understandable fear of unwarranted litigation threatens
patient safety in another way. It impedes efforts of physicians and researchers
to improve the quality of care. As medical care becomes increasingly complex,
there are many opportunities for improving the quality and safety of medical
care, and reducing its costs, through better medical practices. According to
some experts, these quality improvement opportunities hold the promise of not
only significant improvements in patient health outcomes, but also reductions
in medical costs of as much as 30%.21

A broad range of experts on improving health care quality have developed
strong evidence that the best way to achieve these needed improvements in
quality of care is to provide better opportunities for health professionals to
work together to identify errors, or practices that may lead to errors, and
correct them. Many problems in the health care system result not from one
individual's failings, but from complex system failings. These can only be
addressed by collecting information from a broad range of doctors and
hospitals, and encouraging them to collaborate to identify and fix problems.
Already many health care systems are beginning to make these improvements:

The Pittsburgh Regional Healthcare Initiative has brought together
hospitals, health plans, physicians, and purchasers of health care in a
collaborative effort to identify better ways to provide care. It has reduced
blood infections in intensive care units by 20% in just two years, and it is
encouraging reporting to reduce medication errors.

The Baylor Medical Center in Dallas, Texas, has recently initiated
an error reporting system and integrated it into care delivery to reduce
medication and other errors.22

Through the Northern New England Cardiovascular Disease Study Group,
eight hospitals reduced mortality for cardiac bypass surgery by developing a
collaborative patient registry, tracking how care is delivered and what the
outcomes are, and sharing what they learn.

However, these efforts and other efforts are impeded and discouraged by
the lack of clear and comprehensive protection for collaborative quality
efforts. Doctors are reluctant to collect quality-related information and work
together to act on it for fear that it will be used against them or their
colleagues in a lawsuit. Perhaps as many as 95% of adverse events are believed
to go unreported.23 To
make quality improvements, doctors must be able to exchange information about
patient care and how it can be improved--what is the effect of care not just in
one particular institution or of the care provided by one doctor--but how the
patient fares in the system across all providers. These quality efforts require
enhancements to information and reporting systems.

In its recent report, "To Err is Human," the Institute of Medicine (IOM)
observed that, "[R]eporting systems are an important part of improving patient
safety and should be encouraged. These voluntary reporting systems [should]
periodically assess whether additional efforts are needed to address gaps in
information to improve patient safety and to encourage health care
organizations to participate in reporting, and track the development of
new reporting systems as they form."24

However, as the IOM emphasized, fear that information from these
reporting systems will be used to prepare a lawsuit against them, even if they
are not negligent, deters doctors and hospitals from making reports. This fear,
which is understandable in the current litigation climate, impedes quality
improvement efforts. According to many experts, the "#1 barrier" to more
effective quality improvement systems in health care organizations is fear of
creating new avenues of liability by conducting earnest analyses of how health
care can be improved. Without protection, quality discussions to improve health
care provide fodder for litigants to find ways to assert that the status quo is
deficient. Doctors are busy, and they face many pressures. They will be
reluctant to engage in health care improvement efforts if they think that
reports they make and recommendations they make will be thrown back at them or
others in litigation. Quality improvement efforts must be protected if we are
to obtain the full benefit of doctors' experience in improving the quality of
health care.

The IOM Report emphasized the importance of shifting the inquiry from
individuals to the systems in which they work: "The focus must shift from
blaming individuals for past errors to a focus on preventing future errors by
designing safety into the system."25 But the litigation system impedes this
progress--not only because fear of litigation deters reporting but also because
the scope of the litigation system's view is restricted. The litigation system
looks at the past, not the future, and focuses on the individual in an effort
to assess blame rather than considering how improvements can be made in the
system. "Tort law's overly emotional and individualized approach has been
a tragic failure."26

The litigation system also imposes large indirect costs on the health
care system. Defensive medicine that is caused by unlimited and unpredictable
liability awards not only increases patients risk but it also adds costs.
The leading study estimates that limiting unreasonable awards for non-economic
damages could reduce health care costs by 5-9% without adversely affecting
quality of care.28 This
would save $60-108 billion in health care costs each year. These savings would
lower the cost of health insurance and permit an additional 2.4-4.3 million
Americans to obtain insurance.29

The costs of the runaway litigation system are paid by all Americans,
through higher premiums for health insurance (which reduces workers take
home pay if the insurance is provided by an employer), higher out-of-pocket
payments when they obtain care, and higher taxes.

The Federal Government--and thus every taxpayer who pays federal income
and payroll taxes--also pays for health care, in a number of ways. It provides
direct care, for instance, to members of the armed forces, veterans, and
patients served by the Indian Health Service. It provides funding for the
Medicare and Medicaid programs. It funds Community Health Centers. It also
provides assistance, through the tax system, for workers who obtain insurance
through their employment. The direct cost of malpractice coverage and the
indirect cost of defensive medicine increases the amount the Federal Government
must pay through these various channels, it is estimated, by $28.6-47.5 billion
per year.30 If
reasonable limits were placed on non-economic damages to reduce defensive
medicine, it would reduce the amount of taxpayers' money the Federal Government
spends by $25.3-44.3 billion per year.31 This is a very significant amount. It would
more than fund a prescription drug benefit for Medicare beneficiaries
and help uninsured Americans obtain coverage through a refundable health
credit.32

The Increasingly Unpredictable, Costly, and Slow Litigation System is
Responsible

Insurance premiums are largely determined by the expensive litigation
system. The malpractice insurance system and the litigation system are
inexorably linked. The litigation system is expensive, but, at the same time,
it is slow and provides little benefit to patients who are injured by medical
error. Its application is unpredictable, largely random, and standardless. It
is traumatic for all involved.

Most victims of medical error do not file a claim--one comprehensive
study found that only 1.53% of those who were injured by medical negligence
even filed a claim.33
Most claims--57-70%--result in no payment to the patient.34, 35 When
a patient does decide to go into the litigation system, only a very small
number recover anything. One study found that only 8-13% of cases filed went to
trial; and only 1.2-1.9% resulted in a decision for the plaintiff.36

Although most cases do not actually go to trial, it costs a significant
amount of money to defend each claim--an average of $24,669.37 The most dramatic cost,
however, is the cost of the few cases that result in huge jury awards. Even
though few cases result in these awards, they encourage lawyers and plaintiffs
in the hope that they can win this litigation lottery, and they influence every
settlement that is entered into.

A large proportion of these awards is not to compensate injured patients
for their economic loss--such as wage loss, health care costs, and replacing
services the injured patient can longer perform (such as child care). Instead,
much of the judgment (in some cases, particularly the largest judgments,
perhaps 50% or more) is for non-economic damages. Awarded on top of
compensation for the injured patient's actual economic loss, non-economic
damages are said to be compensation for intangible losses, such as pain and
suffering, loss of consortium, hedonic (loss of the enjoyment of life) damages,
and various other theories that are imaginatively created by lawyers to
increase the amount awarded.

Non-economic damages are an effort to compensate a plaintiff with money
for what are in reality non-monetary considerations. The theories on which
these awards are made however, are entirely subjective and without any
standards. As one scholar has observed: The perceived problem of pain and
suffering awards is not simply the amount of money expended, but also the
erratic nature of the process by which the size of the awards is determined.
Juries are simply told to apply their 'enlightened conscience' in selecting a
monetary figure they consider to be fair.38

Unless a state has adopted limitations on non-economic damages, the
system gives juries a blank check to award huge damages based on sympathy,
attractiveness of the plaintiff, and the plaintiffs socio-economic status
(educated, attractive patients recover more than others).39

The cost of these awards for non-economic damages is paid by all other
Americans through higher health care costs, higher health insurance premiums,
higher taxes, reduced access to quality care, and threats to quality of care.
The system permits a few plaintiffs and their lawyers to impose what is in
effect a tax on the rest of the country to reward a very small number of
patients who happen to win the litigation lottery. It is not a democratic
process.

The number of mega-verdicts is increasing rapidly. The average award
rose 76% from 1996-1999.40 The median award in 1999 was $800,000, a
6.7% increase over the 1998 figure of $750,000; and between 1999 and 2000,
median malpractice awards increased nearly 43%.41 Specific physician specialties have seen
disproportionate increases, especially those who deliver babies. In the small
proportion of cases where damages were awarded, the median award in cases
involving obstetricians and gynecologists jumped 43% in one year, from $700,000
in 1999 to $1,000,000 in 2000.42

The number of million dollar plus awards has increased dramatically in
recent years. In the period 1994-1996, 34% of all verdicts that specified
damages assessed awards of $1 million or more. This increased by 50% in four
years; in 1999-2000, 52% of all awards were in excess of $1 million.43 There have been 21 verdicts of
$9 million or more in Mississippi since 1995--one of $100,000,000.44 Before 1995 there had been no
awards in excess of $9,000,000.45

These mega-awards for non-economic damages have occurred (as would be
expected) in states that do not have limitations on the amounts that can be
recovered, as shown in Table 1.

Source: ASPE Review of Media
Reports from The Advocate, Las Vegas Review, North Carolina Lawyers Weekly, and
other select sources.

Mirroring the increase in jury awards, settlement payments have steadily
risen over the last two decades. The average payment per paid claim increased
from approximately $110,000 in 1987 to $250,000 in 1999.46 Defense expenses per paid claim increased by
$24,000 over the same period.47

The winning lottery ticket in litigation, however, is not as attractive
as it may seem at first blush. A plaintiff who wins a judgment must pay the
lawyer 30-40% of it, and sometimes even more. Lawyers, therefore, have an
interest in finding the most attractive case. They develop a portfolio of cases
and have an incentive to gamble on a big "win." If only one results in a huge
verdict, they have had a good payday. Thus, they have incentives to pursue
cases to the end in the hope of winning the lottery, even when their client
would be satisfied by a settlement that would make them whole economically. The
result of the contingency fee arrangement is that lawyers have few incentives
to take on the more difficult cases or those of less attractive patients.

One prominent personal injury trial lawyer explained the secret of his
success: The appearance of the plaintiff [is] number one in attempting to
evaluate a lawsuit because I think that a good healthy-appearing type, one who
would be likeable and one that the jury is going to want to do something for,
can make your case worth double at least for what it would be otherwise and a
bad-appearing plaintiff could make the case worth perhaps half..."48

For most injured patients, therefore, the litigation process, while
offering the remote chance of a jackpot judgment, provides little real benefit,
even for those who file claims and pursue them. Even successful claimants do
not recover anything on average until five years after the injury, longer if
the case goes to trial.49

The friction generated by operating the system takes most of the money.
When doctors and hospitals buy insurance (sometimes they are required to buy
coverage that provides more "protection" than the total amount of their
assets), it is intended to compensate victims of malpractice for their loss.
However, only 28% of what they pay for insurance coverage actually goes to
patients; 72% is spent on legal, administrative, and related costs.50 Less than half of the money
that does go back to injured patients is used to compensate the patient for
economic loss that is not compensated from other sources--the purpose of a
compensation system.51
More than half of the amount the plaintiff receives duplicates other sources of
compensation the patient may have (such as health insurance) and goes for
subjective, non-economic damages (a large part of which, moreover, actually
goes to the plaintiff's lawyer).

The malpractice system does not accurately identify negligence, deter
bad conduct, or provide justice. The results it obtains are unpredictable, even
random. The same study that found that only 1.53% of patients who were injured
by medical error filed a claim also found, on the flip side, that most events
for which claims were filed did not constitute negligence.52 Other studies show the same
random results.53 "The
evidence is growing that there is a poor correlation between injuries caused by
negligent medical treatment and malpractice litigation."54

Not surprisingly, most people involved in health care delivery on a
day-to-day basis believe that the system does not accurately reflect the
realities of health care or correctly identify malpractice. A recent survey
indicated that 83% of physicians and 72% of hospital administrators do not
believe the system achieves a reasonable result.55

With this randomness, the litigation system cannot be expected to deter
error or set meaningful standards of care. That this is, in fact, the case is
evidenced by the IOMs estimate that as many as 98,000 people die each
year from medical error.56 If so, the system is failing not only to
compensate patients fairly, but even more importantly to ensure quality care.

Yet our current system forces injured patients to sue their doctors in
order to obtain compensation and forces both patients and doctors to go through
what is a traumatic process for all. Patients must wait years for recovery (if
they ever win any). Doctors are subject to minute scrutiny of actions they
took, often years before, and their actions are judged on the basis of
hindsight and perhaps even on the basis of changed medical standards. The
process consumes the time and energy of the doctor that could better be spent
in patient care. It is essentially punitive in nature, yet random. Rather than
helping doctors do better, it causes them to engage in defensive medicine. It
is a process that benefits no one except those who live off it--trial lawyers,
both those who represent plaintiffs and those who represent defendants.

Insurance Premiums are Rising Rapidly

The cost of the excesses of the litigation system shows up in the cost
of malpractice insurance coverage. Premiums have increased rapidly over the
past several years. Experts believe we are seeing just the tip of what will
happen this year and next. Rates have escalated rapidly for doctors who
practice internal medicine, general surgery, and obstetrics/gynecology (see
Table 2 below). The average increases ranged from 11% to
17% in 2000, were about 10% in 2001, but are accelerating rapidly this year. A
recent special report revealed that rate increases are averaging 20%.57

However, these increases have varied widely across states, and some
states have experienced increases of 30-75%, although there is no evidence that
patient care had worsened. As seen in Table 3, a major
contributing factor to the most enormous increases in liability premiums has
been rapidly growing awards for non-economic damages in states that have not
reformed their litigation system to put reasonable standards on these awards.

Source: Survey of PIAA
companies, July 2002 and ASPE Review of Articles, 2000-2002.

Among the states with the highest average medical malpractice insurance
premiums are Florida, Illinois, Ohio, Nevada, New York, and West
Virginia.58 These
states have not reformed their litigation systems as others have. (Florida's
caps apply only in limited circumstances. New York has prevented insurers from
raising rates, and accordingly it is expected that substantial increases will
be needed in 2003.) The comparison of the rates in these states with those in
California, which has reformed its litigation system, is shown in
Table 4 below.

TABLE 4. States with High Annual
Premiums in 2001 by SpecialtyCompared to California

The effect of these premiums on what patients must pay for care can be
seen from an example involving obstetrical care. The vast majority of awards
against obstetricians involve poor outcomes at childbirth. As a result, payouts
for poor infant outcomes account for the bulk of obstetricians' insurance
costs. If an obstetrician delivers 100 babies per year (which is roughly the
national average) and the malpractice premium is $200,000 annually (as it is in
Florida), each mother (or the government or her employer who provides her
health insurance) must pay approximately $2,000 merely to pay her share of her
obstetrician's liability insurance. If a physician delivers 50 babies per year,
the cost for malpractice premiums per baby is twice as high, about $4,000. It
is not surprising that expectant mothers are finding their doctors have left
states that support litigation systems imposing these costs.

In addition to premium increases for physicians, nursing home
malpractice costs are rising rapidly because of dramatic increases in both the
number of lawsuits and the size of awards. Nursing homes are a new target of
the litigation system. Between 1995 and 2001, the national average of insurance
costs increased from $240 per occupied skilled nursing bed per year to $2,360.
From 1990 to 2001, the average size of claims tripled, and the number of claims
increased from 3.6 to 11 per 1,000 beds.59

These costs vary widely across states, again in relation to whether a
state has implemented reforms that improve the predictability of the legal
system. Florida ($11,000) had one of the highest per bed costs in
2001.60 Nursing homes
in Mississippi have been faced with increases as great as 900% in the past two
years.61 It has been
recently reported that "nearly all companies that used to write nursing home
liability [insurance] are getting out of the business."62 Since the costs of nursing home care are
mainly paid by Medicaid and Medicare, these increased costs are borne by
taxpayers, and consume resources that could otherwise be used to expand health
(or other) programs.

Insurers are Leaving The Market

The litigation crisis is affecting patients ability to get care
not only because many doctors find the increased premiums unaffordable but also
because liability insurance is increasingly difficult to obtain at any price,
particularly in non-reform states. Demonstrating and exacerbating the problem,
several major carriers have stopped selling malpractice insurance.

St. Paul Companies, which was the largest malpractice carrier in the
United States, covering 9% of doctors, announced in December 2001 that it would
no longer offer coverage to any doctor in the country.63

MIXX pulled out of every state; it will reorganize and sell only in
New Jersey.

PHICO and Frontier Insurance Group have also left the medical
malpractice market.64,
65

States that had not enacted meaningful reforms (such as Nevada, Georgia,
Oregon, Mississippi, Ohio, Pennsylvania, and Washington) were particularly
affected.67 Fifteen
insurers have left the Mississippi market in the past five years.68

States with Realistic Limits on Non-Economic Damages Are Faring Better

The insurance crisis is less acute in states that have reformed their
litigation systems. States with limits of $250,000 or $350,000 on non-economic
damages have average combined highest premium increases of 12-15%, compared to
44% in states without caps on non-economic damages, as shown in
Table 5.

TABLE 5. Comparison of States with
Caps to States without Meaningful Non-Economic Caps(Average Premium
Increase)

States with Caps < $250,000

States without Caps

California

20%

Arkansas

18%

Indiana

15%

Connecticut

50%

Montana

21%

Georgia

32%

Utah

5%

Nevada

35%

New Jersey

24%

Oregon

56%

Pennsylvania

77%

Washington

55%

Ohio

60%

West Virginia

30%

AVERAGE

15%

AVERAGE

44%

States with Caps < $350,000

States without Caps

California

20%

Arkansas

18%

Hawaii

0%

Connecticut

50%

Indiana

15%

Georgia

32%

Michigan

39%

Nevada

35%

Montana

21%

New Jersey

24%

New Mexico

13%

Oregon

56%

North Dakota

0%

Pennsylvania

77%

South Dakota

0%

Washington

55%

Utah

5%

Ohio

60%

Wisconsin

5%

West Virginia

30%

AVERAGE

12%

AVERAGE

44%

SOURCE: Medical Liability Monitor, 2001.
Percentages represent the combined average of the highest premium increases for
OB/GYNs, Internists, and General Surgeons among select states, 2000-2001.
Average highest premium increase is derived from the highest potential premium
increase among internal medicine, general surgery or obstetrics/gynecology
specialists in that state during 2001. These combined averages are not
weighted.

As Table 6 below shows, there is a substantial
difference in the level of medical malpractice premiums in states with
meaningful caps, such as California, Wisconsin, Montana, Utah and Hawaii, and
states without meaningful caps.

TABLE 6. Malpractice Liability Rate
Ranges by Specialty by Geography as of July 2001

In the early 1970s, California faced an access crisis like that facing
many states now and threatening others. With bi-partisan support, including
leadership from then Governor Jerry Brown and now Congressman Henry Waxman,
then chairman of the Assembly's Select Committee on Medical Malpractice,
California enacted comprehensive changes to make its medical liability system
more predictable and rational. The Medical Injury Compensation Reform Act of
1975 (MICRA) made a number of reforms, including:

Shortening the time in which lawsuits could be brought to three
years (thus ensuring that memories would still be fresh and providing some
assurance to doctors that they would not be sued years after an event that they
may well have forgotten).

Providing for periodic payment of damages to ensure the money is
available to the patient in the future.

California has more than 25 years of experience with this reform. It has
been a success. Doctors are not leaving California. Insurance premiums have
risen much more slowly than in the rest of the country without any effect on
the quality of care received by residents of California. Insurance premiums in
California have risen by 167% over this period while those in the rest of the
country have increased 505%.69 This has saved California residents billions
of dollars in health care costs and saved federal taxpayers billions of dollars
in the Medicare and Medicaid programs.

The Presidents Framework for Improving the Medical Liability
System

Federal and state action is needed to address the impact of the medical
liability crisis on health care costs and the quality of care.

Achieving a Fair, Predictable, and Timely Medical
Liability Process

As years of experience in many states have proven, reasonable limits on
the amount of non-economic damages that are awarded significantly restrain
increases in the cost of malpractice premiums. These reforms improve the
predictability of the medical liability system, reducing incentives for filing
frivolous suits and for prolonged litigation. Greater predictability and more
timely resolution of cases means patients who are injured can get fair
compensation more quickly. They also reduce health care costs, enabling
Americans to get more from their health care spending and enabling federal
health programs to provide more relief. They improve access to care, by making
insurance more affordable and available. They also improve the quality of
health care, by avoiding unnecessary defensive treatments and
enabling doctors to spend significantly more time focusing on patient care.
Congress needs to enact legislation that would give all Americans the benefit
of these reforms, eliminate the excesses of the litigation system, and protect
patients ability to get care.

The President supports federal reforms in medical liability law that
would implement these proven steps for improving our health care system:

Improve the ability of all patients who are injured by negligence to
get quicker, unlimited compensation for their economic losses,
including the loss of the ability to provide valuable unpaid services like care
for children or a parent.

Ensure that recoveries for non-economic damages could not exceed a
reasonable amount ($250,000).

Reserve punitive damages for cases that justify them--where there is
clear and convincing proof that the defendant acted with malicious intent or
deliberately failed to avoid unnecessary injury to the patient--and avoid
unreasonable awards (anything in excess of the greater of two times economic
damages or $250,000).

Provide for payment of a judgment over time rather than in one lump
sum--and thus ensure that the money is there for the injured patient when
needed.

Ensure that old cases cannot be brought years after an event when
medical standards may have changed or witnesses memories have faded, by
providing that a case may not be brought more than three years following the
date or injury or one year after the claimant discovers or, with reasonable
diligence, should have discovered the injury.

Informing the jury if a plaintiff also has another source of payment
for the injury, such as health insurance.

Provide that defendants pay any judgment in proportion to their
fault, not on the basis of how deep their pockets are.

The success of the states that have adopted reforms like these shows
that malpractice premiums could be reduced by 34% by adopting these
reforms.70 The savings
to the Federal Government resulting from reduced malpractice premiums would be
$1.68 billion.71

Legislation such as H.R. 4600--a bill introduced by Congressman Jim
Greenwood with almost 100 bipartisan cosponsors--is now pending in Congress.
Enactment of this legislation with improvements to ensure that its meaningful
standards will apply nationally, will be a significant step toward the goals of
affordable, high-quality health care for all Americans, and a fair and
predictable liability system for compensating injured patients.

In addition, there are other promising approaches for compensating
patients injured by negligence fairly and without requiring them to go through
full- scale, time-consuming, and expensive litigation. Just as states like
California have demonstrated the effectiveness of litigation reforms, they
should also adopt and evaluate the impact of alternatives to litigation.

Early Offers is one innovative approach.72 This would provide a new set of balanced
incentives to encourage doctors to make offers, quickly after an injury, to
compensate the patient for economic loss, and for patients to accept. It would
make it possible for injured patients to receive fair compensation quickly, and
over time if any further losses are incurred, without having to enter into the
litigation fray. Because doctors and hospitals would have an incentive to
discover adverse events quickly in order to make a qualifying offer, it would
lead to prompt identification of quality problems. The money that otherwise
would be spent in conducting litigation would be recycled so that more patients
get additional recovery, more quickly, with savings left over to the benefit of
all Americans. It may also be possible to implement an administrative form of
Early Offers as an option for care provided under federal health programs.

A second innovative approach involves strengthening medical review
boards. Boards with special expertise in the technical intricacies of health
care can streamline the fact-gathering and hearing process, make decisions more
accurately, and provide compensation more quickly and predictably than the
current litigation process. As with Early Offers, incentives are necessary for
patients and health care providers to submit cases to the boards and to accept
their decisions.

The Administration intends to work with states on developing and
implementing these alternatives to litigation, so that injured patients can be
fairly compensated quickly and without the trauma and expense that litigation
entails.

The best protection for patients can be provided by medical
professionals, not lawyers. High quality care that achieves the best possible
patient outcomes makes litigation unnecessary. The Administration is already
taking many steps to improve quality of care.

The ability of Americans to work with their doctors to choose and
control their own health care is an important ingredient of quality. The people
who are most affected by the quality of care--patients and their
families--should be the ones deciding how they obtain their health care. To do
so, they need helpful information.

The Administration is undertaking a number of activities to promote
quality by increasing and improving the information available to patients, and
taking other steps to make the system safer and better. Some specific
activities include:

Developing the Consumer Assessment of Health Plans Survey (CAHPS)
that provides information on consumers descriptive ratings of health
plans as well as evaluative ratings of care.

Providing quality information about nursing homes on the Internet to
enable families to make comparisons and informed judgments.

Promoting the introduction and use of bar coding for dispensing
prescription drugs to reduce errors.

Developing voluntary standards necessary to make the creation of an
electronic health care record possible; this would make a patients
medical records available across different care sites, and to the patient.

Examining model disease management programs that can improve the
quality of care for people with asthma and diabetes.

Developing computer software that hospitals can use to identify
quality problems, assisting in quality improvement activities.

Developing a program called Put Prevention into Practice
in order to assure that evidence-based recommendations for clinical prevention
are actually translated into improved delivery of services.

The Administration will work to expand these efforts, to give patients
and their doctors the information they need to make informed and appropriate
medical decisions, while protecting the confidentiality of sensitive
information from inappropriate uses.

One of the key ingredients to reducing errors is optimizing
doctors inherent ethical imperative to improve patients health
care. We must do a better job of helping them and other experts to identify
problems before they result in injury and to develop better ways of providing
care.

Researchers have found that most errors are system failures, rather than
individual faults. Doctors could do their job correctly, and most errors would
still occur. In addition, since human error inevitably occurs, built-in systems
should automatically prevent, detect and/or correct errors before they occur.
Continuous quality improvement processes, which have been effective in many
other "high-risk" sectors, focus on finding ways to design work processes so
that better results and fewer errors can be achieved. This requires measurement
and analysis of the ways health care is provided, and the results of care for
patients. By encouraging the experts to work both inside their own organization
and with outside groups to share information on how medical errors or "near
misses" occur and ways to prevent them, health care organizations have begun to
develop tools to prevent injury and increase knowledge of how errors occur.

Success in improving health care practices to prevent errors and deliver
high-quality care, however, requires a legal environment that encourages health
care professionals and organizations to work together to identify problems in
providing care, evaluate the causes, and use that information to improve care
for all patients.

A principal obstacle to taking these steps is the fear by doctors,
hospitals, and nurses that reports on adverse events and efforts to improve
care will be subject to discovery in lawsuits. As several distinguished
physicians recently wrote, for reasons that include liability issues and
a medical culture that has discouraged open discussion of mistakes, the power
of individual case presentation, so important in the physicians clinical
medicine education, has not been harnessed to educate providers about medical
errors.73

A number of states have enacted peer review statutes that protect the
confidentiality of information reported to hospitals and other health care
entities. States that have such laws have found that they improve reporting of
adverse events, thereby facilitating efforts to identify problems and improve
quality. These protections do not take away from the ability of plaintiffs to
succeed in lawsuits: all of the medical information currently available to
pursue a lawsuit is still available.

Confidentiality protections provided by law for specific activities also
have proven successful in identifying problems and reducing medical errors:

The National Nosocomial Infections Surveillance System, operated by
the Centers for Disease Control, receives voluntary reports from hospitals on
hospital-acquired infections. It has reduced these infections by 34%. The
system works because federal law assures participating hospitals that
information supplied by them will be kept confidential.

MedWatch is a voluntary Medical Products Reporting System operated
by the Food and Drug Administration. Adverse events concerning medical devices
and drugs may be reported to it to identify problem areas. Names of the
reporting doctors and hospitals, and the name of patients involved, are not
releasable under the Federal Freedom of Information Act.

The Department of Veterans Affairs maintains a Patient Safety
Reporting System to learn about issues related to patient safety. To encourage
reporting, federal law provides that reports relating to new safety ideas,
close calls, or unexpected serious injury are confidential and privileged. This
is based on the successful system operated by the National Aeronautics and
Space Administration for aviation safety reporting.

New York State operates the New York Patient Occurrence Reporting
and Tracking System. Adverse events are reported to it. New York State law
prevents disclosure of reports under the states freedom of information
law.

The IOM report To Err is Human noted that while many of the
legal protections developed by states have promise, many current state peer
review statutes do not go far enough. For example, these laws typically apply
only to a single institution and do not reflect the systemic nature of health
care as it is now provided. They do not provide a way to obtain data from
various providers at one time and to compare results. Many states, moreover, do
not have any peer review statutes at all. The IOM, therefore, recommended
legislation to ensure that peer review proceedings and reports remain
confidential.74

The President believes that new, good-faith efforts to improve the
quality and safety of health care should be protected and encouraged, not
penalized by new lawsuits. In his speech in Milwaukee on February 11, President
Bush urged Congress to do something about this problem by enacting legislation
that will give health professionals the confidence necessary to expand their
reporting of problems in the health care system.

Following the President's request, and with assistance from the
Administration, legislation was introduced in both Houses of Congress that
would provide protection from discovery in lawsuits for reports made to Patient
Safety Organizations and for their collaborative efforts to improve care. A
tri-partisan Bill that reflects the President's goals, sponsored by Senators
Jeffords, Breaux, Frist, and Gregg, has been introduced in the Senate (S.
2590). Chairwoman Johnson and others have introduced a similar Bill in the
House (H.R. 4889). Enactment of this legislation will ensure that patient
safety and quality reports are given the protection they deserve. Information
developed or used as part of Patient Safety Organizations' activities would be
protected, and would not be available for trial lawyers to exploit in order to
find new opportunities for litigation.

The assurance of confidentiality is a proven approach to increase
reporting by doctors, nurses, and other health care providers. With more
information, quality experts will be better able to identify problems and
recommend improvements in a proactive way. Rather than reacting to an avoidable
injury or quality problem after it occurs, without benefit of careful and
systematic review, medical professionals will be able to find system weaknesses
and fix them before a patient is injured. Passage of the legislation will
improve the quality of health care.

A recent health insurance study estimate that a
1% increase in health insurance premiums leads to a 0.31% reduction in
employer-sponsored coverage. Gruber, J.; Lettau, M, How elastic is the
firms demand for health insurance, National Bureau of Economic
Research Working Paper, #8021, 2000.

This amount includes $23.66-42.59 billion for
the cost of defensive medicine; $3.91 billion in liability insurance paid to
Medicare, Medicaid, Veterans Affairs, and other federal programs; $246
million in liability insurance paid through health benefits for its employees
and retired employees; and $778 million in lost tax revenue from self-employed
and employer-sponsored health insurance premiums that are excluded from income.

This amount includes $23.66-42.59 billion in
savings from elimination of defensive medicine and $1.68 billion in reductions
in liability insurance premiums paid by the Federal Government.

The Administrations proposed Medicare
prescription drug plan is estimated to cost $190 billion over ten years by the
CBO. The Administrations proposed Health Insurance Tax Credit is
estimated to cost $89 billion over ten years.